Describe the possibility of success by carrying out the alternative suggestion regarding lowering the Danish interest rate level
Based on a prognosis regarding the continuing increase in the Danish level of unemployment in 2003 - 2004, the government considers the use of an expansionary policy.
Some claims that an expansionary fiscal policy in the form of either:
A increase in government spending for the year 2004 - 2005 or
A temporary tax cut (the tax is reduced by 1 % in 2004 and 2005).
The main argument is that these actions will increase aggregate demand in Denmark right away. Others claim that a more appropriate action would be to lower the interest rate to stimulate private investments.
By using the relevant models and based on the fact that Denmark has a fixed exchange rate regime, the following questions are to be answered:
Account for the possibility of success by carrying out the alternative suggestion regarding lowering the Danish interest rate level.